As argued earlier, the scope and effectiveness of Aid for Trade should be considered not only in relation to Africa’s trade capacities, but more broadly in the context of its developmental objectives.
Over the last ten-fifteen years, the continent has witnessed a strong resumption of economic growth, accompanied by improvements in macroeconomic policy, institutional reforms and reduction in armed conflicts. This momentum, which has been barely dented by the global recession, has legitimately sparked renewed optimism about Africa’s development prospects. Yet, it is hard to dispute the view that the continent still has a long way to go in order to achieve structural transformation, thereby enhancing the sustainability of its growth pattern and generating sufficient employment for its large cohorts of entrants into the labour market.
After the failure of import substitution strategies, industrialization has largely bypassed the African continent even with the advent of economic liberalization. If anything, several African countries have actually displayed premature signs of de-industrialization (i.e. declining share of manufacturing value added in GDP) even during the boom period, which was typically underpinned by extractive industries and services sectors (Valensisi and Davis, 2012). Exports remain typically concentrated on a narrow range of products and heavily dependent on primary commodities. The latter account for over 50 per cent of merchandise export revenues in three quarters of the 46 African countries for which data is available, and represent upwards of 90 per cent of the total in twelve of these countries (ECA and AUC, 2013). In addition, even during a booming period such as 1998-2009, a large number of African countries, and indeed the region as a whole, have actually moved towards an increasing concentration of their export bundle (Ofa, Spence, Mevel, and Karingi, 2012).
Moreover, African countries tend to export low-value-added products, even in those sectors where they actually display positive revealed comparative advantages, namely agro-food products, hard commodities and fuels. For example, more than 70 per cent of cocoa exports from Cote d’Ivoire, Ghana, Nigeria and Cameroon are in the form of cocoa beans, which embody a far lower value-added content than cocoa paste, cocoa butter, or chocolate (ECA and AUC, 2013). Put differently, African producers – even the more successful ones that manage to break into foreign markets – remain typically confined to the low end of global value chains, supplying raw material and low-value-added products, that are further transformed abroad.
Against this background, the regional market should in principle provide further scope for African firms to diversify their production, in so far as consumers in developing countries can be expected to have a pattern of demand that is less sophisticated and standard intensive. Trade data indeed reveal that intra-African exports are more diversified than Africa’s exports to the rest of the world;
manufacturing and agro-food products, in particular, account for a larger share of intra-African trade than of the continent’s exports to the rest of the world (ECA, AUC, and AfDB, 2012). Yet, the weight of the intra-African market has remained limited, at around 10-12 per cent of the total exports.
Moreover, the persistently limited weight of intra-industry and intermediates’ trade within Africa are two additional symptoms of the low depth of regional and global production networks in the continent, in striking contrast with the experience of East and South-East Asia (Brulhart, 2008). As
a matter of fact, in 2011, a mere 12 per cent of Africa’s imported intermediates originated within the continent, whilst the remaining 88 per cent had to be sourced from the rest of the world. Even though the value of those intermediate imports had increased nearly six times since the year 2000, in relative terms their share had remained at the same level as ten years before, reflecting the lack of sophistication in regional production networks and the sluggish pace of economic transformation in the continent.19
Against this background, it is critical for Africa’s trade and development strategies to respond to the evolving features of international trade and financial relations and harness them effectively with a view to foster structural transformation. By triggering a far-reaching reorganization of production and associated efficiency gains, the emergence of global value chains opens the way for a renewed “global division of labour”. In so far as the participation to international production networks – even at the low end – can facilitate technological transfer, skills upgrading, and learning-by-doing, it provides a scope to raise productivity levels and move up the value chain, thereby supporting economic diversification and greater value addition. LDCs in particular could benefit from the insertion into global value chains also in view of the extended flexibility they are granted under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), and of the dedicated support to encourage technological transfer. On the contrary, the opportunity costs of remaining confined to an inefficient trade environment, disconnected from the sizeable demand pool represented by the global value chains, are increasingly high. Similarly, the boom in Africa’s economic relations with dynamic Southern partners presents both opportunities – such as growing demand for African product, cheaper access to inputs, additional investment and official flows, etc. – and challenges, like increasing competition in the domestic market, and risk of locking-in Africa’s commodity dependency (ECA 2013a).
From this perspective, Africa’s trade capacities become the key enablers through which the above opportunities, as well as challenges, materialise, which makes the role of Aid for Trade all the more critical. Entering and climbing up value chains requires concerted efforts from both Governments and private sector towards building forward and backward linkages with leading firms. Aid for Trade, in turn, can help addressing market failures and alleviating the binding constraints that dampen the competitiveness of African firms. Again, assistance in the trade policy domain can favour the mainstreaming of regional integration into the national development strategies and contribute to a more proactive engagement of emerging partners both within and outside the region.
If the call for a scale up of Aid for Trade resources is justified in light of Africa’s needs, it should also be clear that protracted aid dependency is not a solution. Africa’s sustained economic growth is creating the conditions to put greater emphasis on domestic resource mobilization, thereby enhancing the ownership of trade and development strategies, and improving the overall sustainability of trade-related intervention. At a time when aid budgets in traditional donor countries are coming under increasing pressure, Africa’s long quest for development finance warrants a new approach that focuses on engaging more closely private actors, strengthening Public Private Partnerships and other innovative financing modalities, and harnessing the potential synergies and complementarities across different partners at global, regional, and domestic level.
19 The data mentioned in this paragraph are based on WITS database.
There is a scope for improving Aid for Trade modalities and make them more conducive towards structural transformation
As argued earlier, there is no question that resource mobilization is a necessary step to implement Africa’s structural transformation agenda and strengthen the continent trade capacities, and the Aid for Trade initiative has certainly represented a significant contribution in that regard. Donors’ fatigue notwithstanding, Aid for Trade commitments to Africa between 2009 and 2011 have more than doubled those of the baseline 2002-2005 period, while disbursements have also increased markedly – even though less spectacularly. In order to enhance the effectiveness of Aid for Trade, though, its modalities have to be conducive to fostering economic diversification capacities and enabling African firms to compete globally. The present section discusses three relevant facets of such modalities – namely volatility, predictability, and selected elements of its sectoral allocation – with a view to assess their consistency with Africa’s efforts to spur economic transformation.
In spite of its significant expansion, the volatility of Aid for Trade financing remains a serious source of concern for African policy-makers, in so far as it adds exogenous elements of uncertainty that may dampen investment, and renders more challenging the implementation of economic policies.
Historical series reveal that, in the five years spanning from 2006 to 2011, African countries have experienced on average nearly two instances of real-term decline of Aid for Trade disbursements.20 Along the same line, Figure 17 shows that real Aid for Trade disbursements to African countries have been rather volatile since 2006: the coefficient of variation of the real growth rate of Aid for Trade disbursements exceeded one in 48 out of 54 countries.21 This suggests that– like other types of ODA flows – Aid for Trade tends to behave in a rather unstable way, with frequent drops even during a phase of overall expansion of Aid for Trade funds.
Figure 17: Growth and volatility of AfT disbursements (2006-2011)
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20 Only four African countries did not suffer any real decline in Aid for Trade disbursements: Gambia, Ghana, Namibia and Rwanda. Besides, it is also worth noting that this finding seems to be only partially driven by the current economic downturn in key donor countries. As a matter of fact, real Aid for Trade disbursements were declining in 18 African countries in 2007, in 24 countries in 2008, in 19 countries in 2009, 16 in 2010 and 22 in 2011.
21 Here volatility is measured as the coefficient of variation of the real growth rate of the underlying variable.
A distinct but related issue attains to the predictability of Aid for Trade flows. Not only in Africa the gap between commitments and disbursements has tended to be rather large (with the exception of 2011), but also the disbursements -to-commitments ratio has typically witnessed significant variability across countries, as well as over time. This may reflect a number of factors, ranging from differential
“absorptive capacities” – for instance, as emphasized in the WTO-AUC-ECA questionnaires, capacities to formulate Aid for Trade projects in due course – to time-lags in the implementation of projects, especially in the infrastructural sector. Whatever the explanation may be, such unpredictability may pose challenges for recipient countries, and questions one of the pillars of the Paris Declaration of Aid Effectiveness, namely the “mutual accountability”.
From the point of view of Africa’s pursuit of structural transformation, a third concern relates to the very adequacy of Aid for Trade funds to the continent’s need, particularly in those sectors that play a key role for achieving economic diversification. Table 2 suggests that the evolution of Aid for Trade disbursements has to some extent reflected Africa’s infrastructural needs, with per capita disbursements to the transport and energy sectors rising from USD 1.36 and USD 2.80 in 2006-2008, to the 2009-2011 levels of USD3.61 and USD 2.08. Regional weighted averages hide an uneven distribution of infrastructural-related support. Indeed, in the median African country Aid for Trade disbursements for energy generation and supply totalled less than one dollar per person per year; hardly the “big push” required in a continent where 57 per cent of the population lacks access to electricity (OECD and IEA, 2012). Moreover, the table shows that the bulk of infrastructural projects are financed on a bilateral basis, with regional and sub-regional infrastructural programmes accounting for barely 6 per cent of the total Aid for Trade support to the transport and energy sector.
Again, Aid for Trade disbursements in favour of the agricultural and manufacturing sectors have indeed increased, in per capita terms, from USD 1.85 and USD 0.41 to USD 2.75 and USD 0.50, respectively.
Whilst the upwards trend may be somewhat encouraging, it remains questionable whether USD 0.50 per person per year adequately reflects the significance attached by the international community to supporting Africa’s industrialization and align its action to the priorities defined by African policy-makers. Again, a growing body of literature has emphasized the sizeable potential gains associated with trade facilitation in the African context and the positive effects this may have in boosting intra-African trade (see for instance Mevel and Karingi, 2012 and Cali and TeWelde, 2011). The recognition of how relevant trade facilitation is in the African context has been accompanied by a sharp increase in corresponding Aid for Trade financing. Yet, in the 2009-2011 period an average of merely USD 0.11 per person per year was disbursed for trade facilitation activities, of which 57 per cent through regional programmes.
Table 2
AfT disbursement to selected sectors (constant 2011 USD per capita) Share of AfT to selected sector disbursed through regional
pro-grammes Africa weighted average Median African country
Average
Agriculture 1.85 2.75 1.64 2.52 7% 12%
Energy Generation and Supply
1.36 2.08 0.42 0.97 5% 6%
Industry 0.41 0.50 0.20 0.18 14% 25%
Trade facilitation 0.03 0.11 0.00 0.01 14% 57%
Transport and
Stor-age 2.80 3.61 3.18 3.65 2% 6%
Overall, the present analysis of Aid for Trade modalities suggests a considerable margin for improvement, and corroborates the findings of the WTO-AUC-ECA questionnaires. The volatility and unpredictability of Aid for Trade disbursements call for a stronger monitoring and evaluation framework, which could facilitate long-term policy and investment planning, and reinforce the crowding in effect Aid for Trade may have on private investment. Secondly, the sectoral data reviewed here question the adequacy of Aid for Trade financing to sectors that are crucial to climb up the product ladder, raise productivity levels and be able to compete internationally, thereby raising some doubts on the degree of alignment with Africa’s quest for structural transformation. This situation calls for a renewed approach towards mobilizing resources for Africa’s trade capacity, gradually steering away from aid dependency to step up innovative financing mechanisms targeted to private actors (whether domestic or international) and new emerging partners.
For the private sector low access to finance, poor infrastructures, and high transaction costs are the main obstacles in connecting with global value chains
With a view to better grasp the key obstacles in connecting to global value chains and get a better understanding of the constraints Aid for Trade is supposed to redress, it is useful to look at the views of private actors and firms. This is precisely what this section intends to do, drawing both on sectoral case studies undertaken by the ECA (ECA and AUC, 2013), and on the findings of a joint OECD-WTO questionnaire that elicited responses from 140 African firms across 5 economic sectors: agro-food, ICT, textiles and apparel, tourism, and transport-logistics (OECD and WTO, 2013).22 Whilst questionnaire results may not be considered statistically significant due to the methodological limitations of this type of exercise and the limited size of the sample, the response can be deemed indicative, particularly when considered in the context of other research on the same issues.
According to questionnaire respondents, whether country suppliers or lead firms, access to trade and business finance, inadequate infrastructural provision, and high transaction costs (due to customs procedures, delays, costly documentation, etc.) are cited as the most binding constraints hampering
22 The OECD-WTO monitoring exercise was undertaken in collaboration with the Grow Africa, the International Chamber of Commerce, the International Trade Centre, the International Telecommunication Union and the United National World Tourism Organization. In the context of the questionnaire, firms were invited to self-select within two categories of respondents either developing country suppliers or lead firms.
the participation of African firms to global value chains.23 In addition, respondents across all sectors identified as key national supply-side constraints the lack of adequately skilled labour force and the poor business and regulatory environment. Interestingly, the issues raised by questionnaire respondents are remarkably consistent with those highlighted by the sectoral case studies undertaken by ECA, and summarized schematically in Annex 8.
The private sector questionnaire also suggest that the main factors influencing lead firms’ sourcing and investment decisions in Africa include not only production costs and market size, but also suppliers’ ability to consistently meet product requirements. This suggests that a firm’s participation to regional and global production networks can favour, at least to some extent, the accumulation of tacit knowledge and capabilities (notably knowledge of foreign markets), as well as the development of a modern business culture sensitive to the requirements of the customers in term of product specifications and timely delivery. In that respect, being connected to global value chains, even at the low end, can pave the way for moving up the value chain and diversifying the set of activities a firm performs.24
Some sector-specific constrains identified in the surveys are also worth mentioning (for more details on sector-specific responses refer to Annex 9 and to OECD and WTO, 2013). For the agro-food sector, key constraints in moving up the value chain included also limited access to production inputs and adequate technology and know-how, high costs of certifications and compliance with mandatory import requirements (e.g. sanitary and phytosanitary measures), and lack of skilled labour. Similar problems hampering a greater value addition also emerge from the case studies, notably about the cocoa industry in West Africa, and the tea and coffee industries in Kenya and Ethiopia respectively (see Annex 8). In addition, the case study on the fruit and vegetable sector highlight the challenges posed by the proliferation of private standards, and the high costs due to informal practices and corruption.
Limited access to finance and red tapes, but also inadequate power and telecommunications infrastructures are regarded as the main barriers to participate in ICT value chains, in line with the peculiarities of the sector. When asked about the typical problems that arise when dealing with African suppliers, lead firms mentioned as their top-four constraints: customs delays and procedures, trade financing difficulties, informal practices and payment requests, and non-compliance to technical specification. For African firms, conversely, factors most influencing investment into ICT were their ability to meet technical standards, business environment, labour skills and productivity, production or service cost and flexibility of contract arrangements.
Concerning the textiles and apparel sector, African businesses stressed that the buyer-driven nature of the supply chain creates an asymmetric market power structure. Like in other sectors, African firms listed as their most binding constraints in connecting to and moving up the value chain: lack of trade finance, customs/border delays and costly procedures, inadequate provision of energy and transport infrastructure, and other factors increasing production costs. Lead firms also highlighted customs
23 Not surprisingly, the specific nature of infrastructural bottleneck varies according to the peculiarities of each sector analyzed: transport and storage facilities are critical in relation to (mostly perishable) agro-food products, power and telecommunications networks for the ICT sector, roads and rails for hard commodities and fuels. In any case, infrastructural gaps are clearly a key obstacle for African firms across the whole range of activities.
24 A similar point is noted, for instance, by Sutton and Kellow, 2010 with reference to Ethiopia. At page 5, when discussing the transition from trading firms to leading manufacturing ones, the authors argue that “It is no accident, however, that half of the leading firms have emerged from the trading sector; for this is often where the deepest and most acute knowledge of local and international market conditions is already at hand.”
procedures, shipping costs and delays, and non-compliance to environmental standards as their most typical difficulties in bringing African suppliers into their supply chains. Sourcing and investment decisions for lead firms are predominately based on the ability for suppliers to consistently meet
procedures, shipping costs and delays, and non-compliance to environmental standards as their most typical difficulties in bringing African suppliers into their supply chains. Sourcing and investment decisions for lead firms are predominately based on the ability for suppliers to consistently meet